Hyman Minsky

Hyman Minsky, Ph.D. (September 23, 1919, Chicago, Illinois – October 24, 1996), was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a radical Keynesian because he supported some government intervention in financial markets and opposed some of the popular deregulation policies in the 1980s, and argued against the accumulation of debt. His research, nevertheless, endeared him to Wall Street. [cite news | title = H. P. Minsky, 77, Economist Who Decoded Lending Trends | url=http://query.nytimes.com/gst/fullpage.html?res=990CEEDB1F30F935A15753C1A960958260 | author = LOUIS UCHITELLE | accessdate=2008-09-26 | publisher = New York Times | date = October 26, 1996 | accessdate = 2008-07-13 ]

Education

Minsky received a bachelor of science degree from the University of Chicago. He went on to earn a master's degree in public administration and a doctorate from Harvard University, where he studied under Joseph Schumpeter and Wassily Leontief.

Financial theory

Dr. Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

This slow movement of the financial system from stability to crisis is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.

"He offered very good insights in the '60s and '70s when linkages between the financial markets and the economy were not as well understood as they are now," said Henry Kaufman, a Wall Street money manager and economist. "He showed us that financial markets could move frequently to excess. And he underscored the importance of the Federal Reserve as a lender of last resort."

Minsky's model of the credit system, which he dubbed the "Financial Instability Hypothesis" (FIH), incorporated many ideas already circulated by John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher [pg. 14, Manias, Panics, and Crashes, 4th Ed. by Charles P. Kindleberger] . "A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."

Disagreeing with many mainstream economists of the day, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a free market economy, unless government steps in to control them, through regulation, central bank action and other tools; such mechanisms, in fact, came into existence in response to the Great Depression. He opposed the deregulation that characterized the 1980s.

It was at the University of California at Berkeley that seminars attended by Bank of America executives helped him to develop his theories about lending and economic activity, views he laid out in two books "John Maynard Keynes" (1975), a classic study of the economist and his contributions, and "Stabilizing an Unstable Economy" (1986), and more than a hundred professional articles.

Minsky's Theories and the Subprime Mortgage Crisis

Hyman Minsky's theories about debt accumulation received revived attention in the media during the Subprime mortgage crisis of the late 2000s. [ [http://www.finfacts.ie/irishfinancenews/article_1014734.shtml The Credit Crisis: Denial, delusion and the "defunct" American economist who foresaw the dénouement] ]

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt. He identified 3 types of borrowers that contribute to the accumulation of insolvent debt: Hedge Borrowers; Speculative Borrowers; and Ponzi Borrowers.

The "hedge borrower" is one who borrows with the intent of making debt payments from cash flows from other investments; The "speculative borrower" who borrows based on the belief that they can service interest on the loan but who must continually roll over the principal into new investments; and the "Ponzi borrower" (named for Charles Ponzi) who relies on the appreciation of the value of their assets (e.g. real estate) to refinance or pay-off their debt but who does not have sufficient resources to repay the original loan, otherwise.

ee also

* Economics
* Irrational exuberance
* Minsky moment

References

External links

* [http://cepa.newschool.edu/het/profiles/minsky.htm Major Works of and Resource on Minsky]
* [http://ethesis.unifr.ch/theses/downloads.php?file=SchnyderM.pdf Marc Schnyder: "Die Hypothese finanzieller Instabilität von Hyman P. Minsky"] Thesis, University of Fribourg, Switzerland, (German)
* [http://online.wsj.com/article/SB118736585456901047.html In Time of Tumult, Obscure Economist Gains Currency]
* [http://www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy New Yorker article on Minsky]
* [http://www.feedblitz.com/t.asp?/268315/9874509/http://www.levy.org/pubs/pn_08_2.pdf Securitization by Hyman Minsky]